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Business Model Basics – Getting It Right First Time

Firstly, this article is not intended to be an exhaustive resource on the subject, nor is it aimed at corporate businesses whose business models can be very complex and take years to put in place. The idea here is that I will introduce the basic idea of business modelling to those unacquainted with the process, so that they can look at their business and consider their business model (if it even exists) and possibly review things a little to get back into shape.

So what do you understand by the word ‘model’ apart from fashion and plastic aeroplanes, a model comprises of a structure of components, that when put together, make the total picture, (so actually the plane metaphor might not be so far out). When we apply the word ‘model’ to your business, we are in this case looking at the various components of the business that will add value to your customers, hence creating the demand for your products and services in the marketplace.

Some of what you will cover as a business model may be found in your initial business plan (if you ever had one) but a business model is not the same as a business plan. A business model represents the DNA of your business. It is the blueprint of what will make your business work and deliver the returns you want, I assume here that most people are in business to make a good lifestyle for themselves, which will come from the profits derived from their ventures into the world of business.

So the basics of your business model will look at what is your business doing? A definitive question and deceptively simple, but many companies don’t actually have this locked down. What is your business doing? Is one question and there will be an answer to that most people will readily be able to answer, but the next question, far more powerful, is what do you WANT your business to be doing?

Now you are in Business Model territory, as you are defining what you WANT to do and how our business will work in the most effective way to get there.

So now you have the starting point for your business model, next you need to figure out the process of how your business will make as much money for the least expenditure of resources in terms of your time, effort, travel, purchases, financial input, as possible. A bad business model is typified in small business, (and even large businesses to some degree) by the business owner effectively running around like a headless chicken, and the staff doing the same, trying to keep customers happy, then looking at their bank balance and realising forlornly, this isn’t working!! And this can be ultimately placed at the door of a faulty business model.

So now you have a laser beam vision of what you WANT to do, you need to look at the basic dynamics of your business: How you will turn your available time and resources into a good return on your investment.

A really good place to start is with your pricing, pricing is probably one of the biggest areas that people get wrong. When you set your prices too low, and your effort and resources to get those products and services to market are too high, you have got it wrong. Setting the wrong price means your business is not going to be scalable, i.e. you cannot grow and make any real money as you have no cash left over in the business. So pricing is a good area to start putting together your business model.

Pricing can be a complex area, but the two things that affect it most are, firstly, what your customers are willing to pay? And secondly, how much you need to charge to make your business profitable.

So now we have an idea of what we want to charge, we now need to look at how we will add value through our products and services, in the most efficient manner so we take as much of that money we charge for ourselves, obviously allowing putting some money back into the business to create a cash reserve.

Time is the next consideration, very importantly, how much does your time and that of your staff cost? Actually work out how much that time is worth in terms of a cash value. Work out how much travel you are doing, (or if just starting out, how much you think you will be doing), to service your business?

A good business model will be one where your business has scalability built in, this simply means that the business CAN grow, beyond simply yours and your staff’s available time, so you are not at a ceiling point and you can grow, (if that is what you want).

Even if you run a business and decide you are happy with it being small and keeping it that way, you will almost certainly want to have comfort in the use of your time, so that you are not running around with no time left and not enough reward.

The next area is buying. What are you spending money on and how much are you paying relative to how much you are making? A good business model will be one where you have aggressively (in the nicest way) sought the best prices so you can make a good profit, allowing for delivery charges etc. Look at this area and make sure it works, that is modelling, simulating the scenarios so you can see it all working.

The last area I will ask you to consider, is what you are personally taking out of the business? Many business owners are taking a little too much from their businesses and that can extend to the salaries and benefits extended to their staff. I am all in favour of having a highly dedicated workforce, and this should rightly be rewarded, but control is so important here as getting it wrong can be difficult to reverse once it is allowed to get out of control.

Your business model MUST be able to sustain the money you are taking out of the business, as mentioned, the idea should be that the business grows a surplus of cash, so that you are well placed for any opportunities that may require funding, or for overcoming any short term adversity.

In summary then, your business model is the DNA of how you WANT your business to work for you. It is the simulation of how it will work and an overview of how you will maximise your return for your time, effort and financial investment.

A simple business model can usually fit on the back of a postcard, it summarises the main cornerstones of your success formula, most importantly, you CAN change your model along the way. Very few get it 100% right first time every time, and it’s actually fun working on what will ultimately make you successful and hopefully give you a very good lifestyle.

Let me know how it goes for you.

Phil Ashforth is a UK based Marketing Consultant, working with businesses both nationally and internationally on a wide range of marketing issues and driving many marketing projects forward for both corporate and SME companies.